Sunday, June 10, 2007

‘…One of the reasons we fail to understand business crime is because we put crime into a category that is separate from normal business. Much crime does not fit into a separate category. It is primarily a business activity...’

William Chambliss.

As someone who has spent all his adult life dealing with the phenomenon of white collar crime, I never cease to be amazed at just how little willingness is shown by the financial services industry in encouraging strategically-positioned practitioners to gain higher academic qualifications in an understanding and interpretation of the issue.

Financial crime now costs UK plc billions of pounds annually, money which is deducted directly from the bottom line of the balance sheet. The problem is so acute that the FSA now makes it a primary requirement of good governance that all regulated member institutions must adopt a risk-based approach towards the prevention and interdiction of financial crime, as part of their compliance strategies.

The responsibility for ensuring the successful implementation of this policy lies at senior board level, but when such individuals are questioned as to their domain knowledge of the causes, the practices, the activities, the phenomenology of the problem they are required to prevent, the level of practical expertise is a resounding zero.

Work down the food-chain within the corporation, and try and find anyone who has any understanding of the way in which the criminal mind works, and you will find an almost complete void. Occasionally you may be lucky and you will discover a former detective or seasoned former police officer in post in some dark corner of a financial institution, but their role and position is rarely a senior one, and they have a very limited input on policy-making decisions.

But why stop with the regulated sector, examine the regulatory agencies. How many experienced former detectives with the knowledge or expertise to be able to understand the criminal mentality are there holding down senior policy-informing roles within the various regulatory agencies? Who in their various financial crime teams has really worked in the arena of financial crime and who has had any experience of really dealing with professional financial criminals. This is not to belittle any of the efforts made by these good people, it merely asks the question, what is the basis of theirexperience or knowledge which befits them for this role?

I recall meeting a woman at a conference not so long ago who asked me a series of questions on my presentation about criminal trends and criminological tendencies. It turned out that she had been seconded to one of the regulators and was responsible for determining a financial crime policy initiative. When asked what experience she possessed, the answer was that she had absolutely none at all, but she did have a Ph.D in finance and as her employing bank had no work for her at that time, she had been sent on a sabbatical to the regulatory agency to fill in the time until the market conditions improved. The regulator obviously had no room for her in any of the financial policy divisions, so they tucked her away in the financial crime office and told her to find something to do. She was reduced to doing the rounds of the conferences, trying to dredge up enough background information to enable her to make a contribution to the internal debate for which she had been employed.

It is instances like this that make the wider white collar crime debate risible, and illustrate just how little anyone, government or industry really care about domain knowledge and expertise in the field of white collar crime.

Perhaps this goes some way to explain why the volume of financial crime is rising exponentially, and why Government is repeatedly demonstrating its powerlessness to deal with the phenomenon.

Recent Government initiatives have either just dwindled away to nothing, (taking yobboes to cashpoints to draw out cash to pay their on the spot fines); and some like the Asset Recovery Agency, (ARA) which have been forced to close down because of their incredible inefficiency. When she was appointed to the role of head of the ARA, Jane Earl was interviewed by reporter Nick Cochan for the Observer. He wrote;

‘…A new crime fighter is gearing up to take on the heaviest of Britain's organised criminals gangs. But the new sheriff in town is not a gun-toting cop or even a hot-shot lawyer. Jane Earl is a cool administrator from the Home Counties whose experience in law enforcement goes no further than managing committees in local councils - she has just quit as chief executive of Wokingham Council - and keeping order in the Parent-Teacher Association of her children's school. Now this sober lady from Reading will be fighting the most vicious type of organised criminal, including Colombian, Irish and Islamic terrorists and the Russian mafia. But she is determined not to change her life as efficient mother and school governor. Despite security concerns expressed by her staff, she continues to cycle to her local station…’

Ms Earl came to her role with no qualifications, domain knowledge or life experience of dealing with the very people whom she was going to be expected to confront on a daily basis. It’s not her fault that she was appointed by some apparatchik who almost inevitably shared her complete lack of criminological experience, but who believed her when she declared her ‘passion’ for finding new ways of dealing with crime. This was ‘Blair-speak’ with knobs on and people who talk the language of New Labour get the jobs under New Labour!

Some of the applicants for the head of the ARA were deeply experienced practitioners who had already proved their mettle in asset recovery operations against major criminals and Irish terrorists, and who would have brought significant experience to the role. However, skills, knowledge, expertise, a few hardened battle scars, none of these count for anything as long as you can talk the talk of the new regime of Major-Generals appointed by Lord Protector Blair to rule the UK’s public policies.

Jane Earl herself expresses disappointment at the failure of her agency to deliver results. She talks in a surprised voice of the tactics adopted by her targets and their lawyers in using the civil court procedure to fight back against ARA actions. She appears distracted by the fact that those with the most to lose, financially, do not appear to have any qualm about taking every point to obfuscate the issue and to deflect the Court’s direction, and make the ARA prove its case to the ultimate degree.

What did she expect? It was not her fault that she had no experience of dealing with professional law breakers, who would and should be expected to fight back with every last resource against having their assets confiscated. The fault should lie with the bureaucrat who failed to understand the problem either, and who, instead, unblinkingly obeyed Tony Blair when he said that taking the profits of crime from criminals would teach them not to do it again, and would prove to be a major disincentive to crime.

Let me let you into a little secret known only to former detectives. All you do when you take assets from a thief is to guarantee another series of thefts!

The point of my concern is that there is frankly no agenda, either within Government or within the industry it seeks to regulate, to provide any level of real academic expertise designed to enable the acquirer to truly understand the nature of the criminal mentality and criminogenic behaviour.

Why should this be? Is it that those who administer these environments have merely overlooked the importance of these subjects; or is it more sinister, reflecting a deeply submerged realization, as the quotation at the start of this essay pointed out, that so many of the practices which are commonplace in the financial sector, and which are openly encouraged by those with money to make, are little more than thinly-disguised criminal activities in themselves, and that those who engage in them are indeed nothing more than financial criminals, in nice suits?

Could it be that those with the most to lose from a truly transparent evaluation of so many of the business customs and practices prevalent in the market, deliberately discourage any wish to study or become proficient in the understanding of the problem, for fear that this new-found knowledge might become antithetical to the continued ambitions of those with the most to gain from an unfettered continuation of the status-quo.

Now before someone from a training company suffers a sudden rush of blood to the head, let my stress that I am not talking about training! There are more training companies out there than you can shake a stick at, some are very good, some are not quite so good, and some are downright useless!

Training is vital for a well-regulated industry, and is legally mandatory, but with respect, a training course is designed for entirely different purposes. It is there to enable staff to be aware of their role and responsibilities within the regulated sector, and to give them a very basic but workmanlike knowledge of the jobs they have to perform.

It simply does not and can provide the level of academic input, nor demands the depth of intellectual rigour which a higher degree requires, and it is this level of academic excellence of which I speak. Training merely looks at the status quo and provides responses in suitable circumstances. Education looks at the status quo and asks ‘Why?’ and ‘How?’ and ‘What If?’ and ‘How does this inform me?’ and ‘What if this were to happen again in other circumstances?’ and ‘How would I react if I saw this conduct but in very different circumstances?’ Training gives people a series of possible answers. Education teaches people to ask further questions.

All too often I have addressed these issues with practitioners, only to be told, and with apologies to Pink Floyd, ‘we don’t need no education’. Academic study, so it seems, is not required, merely a minimally-necessary level of training to satisfy the regulators. Universities have serious difficulty in attracting students to study for higher degrees in white collar criminology or financial crime management. I have approached a major BusinessSchool and suggested that as part of their MBA topics which dealt with issues supplementary to business, they should include a series of lectures on financial criminology. The proposal was turned down out of hand.

Yet this is such a short-sighted policy. What lies behind the adamant refusal to admit the need for more academic knowledge, research and study in appropriate circumstances?

The study of white-collar criminology teaches us a significant amount about the human condition, and helps to interpret the attitudes which are so often expressed by practitioners.

The work of the American criminologist, Austin Turk on ‘Conflict and Criminality’ provides an illuminating insight into the work attitudes of financial services compliance officers, and explains a great deal about their discomfiture about being perceived to be performing a ‘policing’ function within a financial environment. The fact that the original research dealt with township kids in South Africa and their relationships with the white Afrikaaner police who patrolled their squatter camps is irrelevant, the parallels with the financial sector regulators were exact and very informing.

White collar criminology also assists in our understanding of why City people behave in the way they do and why they so often get their institutions into difficulty. Nick Leeson was an accident waiting to happen. Had one of his managers read and understood Christopher Stanley’s research on the legitimation of deviancy and the Anomie of Affluence, they would have identified the risk Leeson posed.

In his article, 'Mavericks at the Casino: Legal and Ethical Indeterminancy in the Financial Markets', Stanley identified the development of a new phenomenon within the previously ordered environment of the City of London. He observed;

'…The New City reflected the ideological aspirations of a system of political administrations which disrupted the post-war consensus of relations between polity and economy. It also reflected the Casino or Disorganisation of Capitalism: 'an international financial system in which gamblers in the casino have got out of hand'…Thus settled norms of conduct were open to disruption'.

I suspect that deep at the root of the problem of the institutionalised intransigence to accept that criminology can help understand the white collar fraud and financial crime phenomenon, lie attitudes and preconceptions about class. It is almost as if the final recognition that the wrong-doing of the middle and educated classes can be identified in exactly the same way as the behaviour of more easily recognizable members of the criminal underclass, is something which those who engage in this kind of conduct, do not wish to accept.

The professional and chattering classes do not want to be confronted by the fact that their behaviour is no different from the class they profess to despise, and with whom they would never, ever admit any degree of similarity. In the case of politicians, this sense of social differentiation is even more pronounced, but because they do not understand the criminological implications of their behaviour, they inadvertently make themselves even more ridiculous.

Take, as an example, the recent spat between No.10 and the police investigating the ‘Cash for Honours’ scandal.

Detectives, and particularly those who deal with the crimes of the powerful know, as a given, that when police investigations begin to get close to the source of the problem, the suspects can rely on friends and commercial colleagues to begin to mount a vociferous defence of their interests. It is a well recognized criminological phenomenon within this class type. Those who can still remember the Guinness and Blue Arrow investigations will recall the tidal wave of sneering press stories and adverse publicity that sought to rubbish the validity of the police and SFO investigations. The aim of course, was to seek to influence the political will to continue the investigations and to undermine the possibility of prosecutions.

Detectives ignore these interventions, treating them as nothing more than a mild irritant, because they know that the louder the rubbishing, and the more elevated the status of the rubbisher, the closer they are getting to the truth.

The detectives who arrested the No 10 aide, Ruth Turner, will not have been fazed in the least by the interventions of the likes of David Blunkett, a man who can be relied upon to provide a ‘rent-a-quote’ service at the slightest opportunity, Tessa Jowell or Lord Puttnam. On the contrary, they will have been reassured by these uninformed but clearly coordinated outbursts, because they will know that they are really on the right track, and their investigations are now really ‘shaking the tree’ in the right places.

When people like Blunkett, or Jowell, both of whom have been members of a Cabinet which has introduced some of the most draconian measures to deal with the criminal class in recent history, begin to voice concern at the use of perfectly ordinary police powers against one of their own protected species, what they are really doing is seeking to engage in special pleading on behalf of someone who comes from their politically-elite environment. They don’t mind such powers being used against criminals suspected of burglary or theft or illegal immigrants, because they of course, are different; but when it comes to someone from their milieu, then a whole different range of attitudes is expressed. The fact that Ruth Turner is now suspected of having committed an extremely serious offence of attempting to pervert the course of justice, is irrelevant. She, so they claim, should have been treated differently!

The police know better. They know that when any person is faced with the possibility of going to prison, possibly for a long time, for allegedly committing a serious offence, they will behave in exactly the same way as their brothers and sisters under the skin, and try and cover up their actions, destroy evidence or otherwise seek to impede the police investigation. They know that it doesn’t matter what class you come from, when the chips are down then we all revert to type, and they respond accordingly!

Blunkett, Jowell and Puttnam do not understand the criminological implications of their contributions, they are merely responding in a predictable political class-based fashion, but their words are doing nothing to help Ruth Turner, or anyone else for that matter. They would do their so-called friends a lot more good if they just shut up! However, the arrogance of power and high office is a dangerous combination, and it is to be doubted whether they will see the wisdom of this course of action.

Senior management needs to completely reconsider its attitudes towards providing selected personnel with the academic education necessary to understand the white collar crime phenomenon. Young ambitious graduates, looking to further their careers in business, finance and management, think nothing of signing up for very expensive MBA courses. The MBA has almost become the sine qua non of the level of qualification required for entry to the highest levels of management.

If business provides such recognition of the MBA, then why does it refuse to contemplate the opportunity offered by the provision of the highest level of crime preventative and loss forestalling understanding and expertise offered by a Master’s degree in white collar criminology. Such degrees do exist, but unless they are recognized for being the sources of inspired business awareness and best practice facilitators which they are, the courses will be closed down, and the costs of fraud and losses to business will continue to follow their exponential growth curve.

‘…Every age has its peculiar folly: some scheme, project, or fantasy into which it plunges, spurred on by love of gain, the necessity of excitement, or the mere love of imitation…’

In 1841, a Scots writer Charles Mackay, LL.D, published a book, which would become a huge influence in the lives and minds of those, like me, who marvel at the many manifestations of human folly.

Entitled ‘Extraordinary Popular Delusions and the Madness of Crowds’, Mackay described in splendid detail, a whole series of events which had, in their own individual ways, caught the attention of a group of people, who had, as a result, allowed all reason and logic to desert them, and had become caught up in a spiral of what could only, in hindsight, be diagnosed as a form of temporary madness or mania.

Among other topics covered by this man’s research were the so-called ‘Mississippi Scheme’, a plan hatched by an 18th century mathematical adventurer called John Law, by which he proposed to manage France’s internal debt; or the more infamous ‘South Sea Bubble’, an 18th century stock ramping pump and dump scheme of such brazen insolence, that any contemporary con-man trying to pull it off today would blush for shame.

The beauty of Mackay’s book, and it is still in print, even today, is that it proves that nothing has changed, and as the book of Ecclesiastes advises us ‘…there is nothing new under the sun…’

How right, and we are still being caught up by the promoters of various schemes which are designed to encourage us to spend significant amounts of money in the belief that without this significant outlay, we could easily render ourselves at risk of regulatory intervention, with all the downside that such an action brings with it in its wake!

How many readers remember the last few years prior to the Millennium moment, those scant ticks when the second hand on our clocks turned 1999 into the year 2000?

Did the earth stop turning; did airliners fall from the sky, or trains run on uncontrollably? Did the ATM machines dry up so that we were left with no cash to spend on January 1st?

Remember the years of Y2K, and the prognostications of the firms of consultants and the IT companies, who managed to persuade an otherwise generally sane and sensible business constituency, to spend obscene sums of money on ensuring their IT systems would survive the seminal moment when the clocks changed!

Consulting firms made fortunes so large that their start-up partners were able to retire. IT companies, wallowing in a cash-flow of such tsunami-like proportions, began to re-write their profit projections for years to come.

I know because I worked for one such company at that time, and I recall the glee in the voice of the international chairman as he glibly informed the entire assembled staff of this global company, all linked by satellite communications, that on the basis of the profits that the company had made in 1999, (based almost entirely on the income from Y2K consulting), that he could confidently predict that we would become the world’s leading IT software provider within 12 months. The new slogan (or battle cry as he called it) was to be ‘Number one in 001’ and we were to proudly use this phrase at every opportunity.

I watched, appalled, as so-called sane men and women, danced on table tops waving spilling champagne glasses, screaming this fatuous nonsense at the tops of their voices. This way madness lies!

If only Y2K was the only example. Who now also recalls the heady days of ‘…CRM…’, or ‘…Bank in a box…’! Anti-money laundering enjoyed a small frisson for a while, but that has quickly become smothered by a greater emphasis on ‘…Financial Crime…’ ‘…Basle II…’ became a catchword trotted out by the armies of slick young men and women in slightly shiny suits, all clutching their laptop bags. ‘…Enterprise Risk Management…’ had its day and became popular for a while. What all these issues had in common was that the big consulting companies and the IT firms which school round them like pilot fish around a Great White shark, smelt blood in the water. More importantly it was your blood, and that of your employers, and like their cartilaginous cousins, they honed in on the source with unerring accuracy!

Now, the new source of consultant bait or ‘chum’ is being tipped into the water, and the sharks are gathering for another predator’s ball.

In Europe, MIFID is the latest acronym, the newest mouthful of initials on the block, and the consultants are moving out in their droves to drive up the fear factor and sell more and more of their expensive time to the unsuspecting and the gullible.

MiFID – the Markets in Financial Instruments Directive – comes into effect on 1 November 2007, when it will replace the existing Investment Services Directive (ISD). MiFID introduces new and more extensive requirements that firms will have to adapt to, in particular for their conduct of business and internal organisation. It applies to allinvestment banks who do securities business in Europe, and that includes many of the major foreign players who do business in London.

MiFID makes significant changes to the regulatory framework to reflect developments in financial services and markets. It widens the range of ‘core’ investment services and activities that firms can passport. It upgrades advice that involves a personal recommendation to a core investment service that can be passported on a stand-alone basis. It introduces operating a multilateral trading facility (MTF) as a new core investment service covered by the passport; and extends the scope of the passport to cover commodity derivatives, credit derivatives and financial contracts for differences for the first time.

As the timing of the MIFID issue gathers pace, the time remaining to implement the necessary and relevant changes is shortening, but this was ever so. Even after the money laundering regulations were introduced, very few banks really met the requisite compliance dates with any accuracy.

However, MIFID possesses all the necessary characteristics for a new, consultantancy-led attack plan. It contains a mouthful of frankly ugly initials which few people really understand. It comes from Brussels so it is almost entirely incomprehensible; and it has a direct impact upon the financial services market (the lowest of all the hanging fruit in the market), and it is rapidly becoming the new ‘delusion’, the latest mania, and the consultants and IT companies are gearing up to enhance the fear factor so as to sell you new products.

The important thing is to recognise the facts and the realities and keep them firmly identified in your minds, so that the snake-oil salesmen cannot fob you off with more expensive and unnecessary additions to your already over-burdened IT systems.

MIFID is an important issue, but it has to be seen in the context in which it appears. Too many IT companies are trying to make the suggestion that the MIFID function sits most realistically within the Risk Management profile (which to a small extent is true), and that as a result, its IT model and profile can be seen in the same context as that of the AML and financial crime management environment, (which to a huge extent is not true at all). This fact will not stop the IT firms from trying to ‘shoe-horn’ you into their particular product portfolios, after all why let the facts get in the way of a slick sell? How about this example from a major software provider;

The weasel word here is ‘impacted’, but it permits them to get in a mention of the initials MIFID, thus allowing them to create a tenuous link, thereby enabling them to gain a free entry into mentioning a wider area of their product portfolio, much of which is of a legacy standard, and has no direct relationship with a MIFID requirement.

There will be significant changes to be made to your IT function, and a lot of success is going to depend upon the working relationship that firms can generate with their IT providers. The information flows which enable all the market participants to trade, whether on the buy or sell side will have to be properly configured. Transaction reporting will change a great deal for all European participants and this feature will require a lot of development for the operations function. IT providers need to be involved at the earliest stage if a lot of infrastructural change is required, and cooperation between practitioners will pay dividends by helping to reduce costs.

The point is that MIFID is not introducing a significantly new piece of legal change, unlike the rules regarding anti-money laundering. MIFID is an amending structure, changing existing and traditional methods of trading, and laying down the foundations of a completely new way of dealing in traded instruments. The immediate changes could well be the first phase of a series of on-going developments which may well take a few years to come to fruition, and which may well see even further additional changes being introduced. No-one should assume that the present phase will be the be-all and the end-all.

MIFID does have implications for a number of internal departments, not just IT. One problem is that at the moment, the kind of changes which will be introduced may not be wholly transparent, and it will be difficult for too rigid a degree of adherence to any defined compliance regime to be anticipated in the early stages. A lot of time and effort will need to be spent observing how the changes will develop and what impact they will have on the market as a whole. This will have immediate impacts on the Business sector. Compliance will also need to be monitoring these changes to ensure they are engaging with the new trading environment ‘best practice’ regime.

The point of these commentaries is to identify most clearly the range of differences which the MIFID requirements will impose, in contrast to the wholly new regime of legal, philosophical and technological change introduced by the AML legislation.

Frankly, Financial Crime, including AML and MIFID are entirely different creatures, and should not be seen in the same IT context. Seeking to use existing AML systems and methodologies to create a complementary MIFID ‘best practice’ environment is a pointless exercise, and will only lead to confusion, and increased problems on both sides of the requirement.

Trading in securities and derivative instruments is a recognised money laundering methodology. It can also engage with elements of market abuse, insider trading and other forms of trading malpractice. The proceeds from such activity can be laundered. Monitoring the transactions of an individual client’s account in order to determine whether his business conduct is suspicious, is a primary requirement for the purposes of an AML ‘best practice’ regime, and many software solutions are available to help meet those demands. What is monitored, is the financial outcome of the trading, or indeed, any other form of commercial enterprise, it is not the trading itself which is examined, as in an AML transaction monitoring environment, because that would tell an investigator very little at all.

The requirements imposed by MIFID are wholly different and deal with the needs of the successful creation of a unified European market in traded financial instruments.

Any IT or Management Consultant who tries to obfuscate the distinction between the two issues by trying to propose a unified solution should be treated with great caution. Too many of these people have merely taken their existing Basle II or their CRM teams, and re-named them as their MIFID teams. In consulting, it was ever thus.

The big problem is that today, too many banks and financial institutions are unwilling to make informed decisions about their businesses without the input from these teams of so-called experts. The reasons almost always lie with the non-executive directors who are simply unwilling to face the possibility of a new concept which could conceivably cost them money and reputation if it is wrongly applied or improperly executed, and who are not willing to back their own judgement. How often have I heard the phrase, ‘…let us employ X,Y & Z Consulting so that if they get it wrong, at least we can sue them…’

Whatever else financial institutions do, they must not take their eye off the requirements to maintain a ‘best practice’ provision in their Financial Crime and AML compliance profile. They must also implement and manage their MIFID responsibilities. Mixing up these messages, thus getting them both wrong would be a recipe for disaster. Don’t let it happen to you!

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!